What is a Token? How is it different from a coin? How to trade Tokens?

In the early stages of Crypto Assets, the term "coin" was mainly used, such as Bitcoin, Litecoin, and DOGE. With the emergence of Ethereum, "coin" and "Token" began to be used interchangeably, with the Chinese translation being either Token or Crypto Assets, making it difficult for many investors to distinguish between the two. Next, we will focus on the definition of Tokens, the types of Tokens, and comparisons with coins.

Definition of Token

Token, in English, is usually translated as pass, credential, or token. It is a type of digital asset that represents specific rights, credentials, or other forms, and can be traded, transferred, and exchanged on the corresponding blockchain.

Tokens are issued based on existing public chains and do not have their own dedicated public chain. In 2015, Ethereum launched the ERC-20 token standard, allowing anyone to issue their own tokens on it. As of now, Ethereum remains the public chain with the largest token issuance.

It is worth noting that Token is a generic term and not the name of a specific token. Simply put, tokens that are not native to public chains can all be referred to as tokens, including DeFi, Layer-2, and NFT tokens (such as APE, SAND), etc.

Types and Uses of Tokens

According to the classification of the Swiss Financial Market Supervisory Authority (FINMA), tokens can be divided into three categories:

Payment Token

The main goal is to achieve secure, efficient, and low-fee payments. Typical cases are stablecoins, such as USDT, USDC, DAI, etc.

functional Token

Aimed at providing access for various applications, mainly ERC-20 Tokens on Ethereum.

asset-type Token

As a development asset of a certain project, holding the Token means being part of the project and enjoying the value of the Token, similar to stocks. It is important to note that in the field of Crypto Assets, holding a Token does not usually represent ownership of the company or project, and may even lack dividend rights.

In theory, tokens can be divided into these three categories, but in practical applications, a token may simultaneously possess two or even three attributes, making strict classification difficult.

The Difference Between Tokens and Coins

The fundamental difference is that coins have their own blockchains, for example, Bitcoin (BTC) runs on the Bitcoin blockchain, and Ether (ETH) runs on the Ethereum blockchain; they are the native assets of these networks. On the other hand, tokens do not have their own blockchains; they are built on existing blockchain ecosystems. This also leads to the fact that the ecological applications of tokens are usually not as robust as those of coins, and they may even be unable to support the development of applications.

In addition, the main functions of the two are also different, including differences in issuance methods, application scope, and value stability.

Which is better for investment: tokens or coins?

Is it better to invest in tokens or coins? In fact, the two are closely related and each has its own advantages.

If coins are regarded as public chain type cryptocurrencies, then tokens can be simply understood as application type cryptocurrencies. The former primarily addresses infrastructure issues, indirectly meeting people's living needs, while the latter develops and provides various applications or services based on that, directly meeting people's living needs. It can be seen that both are important and indispensable.

Compared to coins, the applications or services of tokens have greater scalability and are relatively easy to implement. Generally speaking, the value of coins is limited to building and optimizing infrastructure, and once they fail, there is often no alternative. The value of tokens lies in providing various different services or application products; even if a certain product is not well-received in the market, new products can still be launched, such as MakerDAO launching RWA business.

In addition, the volatility of Tokens is usually greater than that of coins, for example, the price fluctuations of UNI, SNX, and MKR are larger than those of BTC and ETH, especially during a bull market, which creates more and larger investment opportunities for short-term investors. Of course, high volatility also means high risk.

How to invest in Tokens?

Similar to coins, there are mainly two methods for investing in tokens:

Method 1: Spot Trading Token

Spot trading is a full transaction that involves actual assets. For example, if the current price of UNI is 3 USD, A sells one UNI to B, then A will receive the 3 USD paid by B, and B will receive one UNI and gain ownership.

It is important to remind that when engaging in spot trading, one must be aware of counterfeit coins with the same name. For example, a certain team developed a valuable Token named ABC. Another team, seeing this situation, quickly issued a Token with the same name ABC, but in reality, it has no value and may not even be listed on an exchange. Once purchased, it may be impossible to sell. Therefore, when encountering coins with the same name, be sure to verify the Token's contract address on the official website or blockchain explorer first.

Method 2: Margin Trading Token

In addition to spot trading, tokens can also be traded through margin trading. In most cases, this type of trading does not involve actual tokens, so it will not face the risks mentioned above.

Unlike spot trading, which requires full payment, margin trading is a type of non-full payment trading, meaning that only a portion of the assets is used as margin, without the need to pay the full amount to make a purchase.

For example, using 10x leverage to go long on UNI, assuming the current price is $3, you only need to spend $0.3 to purchase a position of 1 UNI. If it's a contract for difference and U-based contract trading, you do not actually hold the native Token UNI.

As mentioned earlier, the volatility of Tokens is usually greater than that of coins, so it is important to pay attention to position control and leverage size, especially the leverage multiplier should not exceed 10 times. For BTC, a daily volatility of 10% is becoming increasingly rare, but the volatility of Tokens remains high, especially for newly issued Tokens, so one must be cautious of liquidation risks.

Whether it is spot or margin trading, the operational process is generally the same. However, choosing a secure trading platform regulated by authoritative institutions is the primary consideration when investing in Tokens.

Frequently Asked Questions

How secure is the Token?

After understanding the definition of Token, we can know that: coin is the native Token of the public chain, while Token is issued additionally based on it. From this perspective, if the security of the public chain technology is relatively good, the corresponding Token will also be guaranteed to a certain extent. Currently, Ethereum is recognized as a relatively secure and high-performance public chain, while new public chains lack long-term verification, so careful consideration should be taken when choosing Tokens issued by new public chains.

However, compared to native coins, the security of tokens may be slightly inadequate, with various risks such as malicious issuance, the issuing party absconding, insufficient technical capabilities of the team, and contract vulnerabilities. Therefore, investors need to be more cautious when choosing tokens and thoroughly assess the related risks.